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To: nextrade! who wrote (24382)	10/8/2004 6:59:40 PM
From: nextrade!	Read Replies (1) \| Respond to of 306849

The failure of Keynesian policy Keynesian policies are back in vogue brookesnews.com Gerard Jackson BrookesNews.Com Monday 4 October 2004 I recently came across several articles praising Keynesian policies. One of these eagerly explained why Keynesianism was successfully pulling the American economy out of recession. Another argued that because Australia has a very poor savings rate this means that tax-cutting and spending policies would have a stimulatory effect on her economy. This argument is also used to justify Keynesian policies in the US. Now more thoughtful Keynesians will admit that in open economies balance-of-payments problems will emerge if their policies caused the country to grow Back in 1998 this observation was qualified with the view that the world was sliding into a recession that would reduce the demand for Australian exports which in turn would cause an external deficit anyway. Therefore the government had nothing to lose in implementing Keynesian spending programs. This was and is economic nonsense. Now it is true that tax cuts stimulate economies but not in the way Keynesians claim. Taxes are a burden on production and anything that reduces that burden will stimulate output and increase savings. Even where the savings rate is very low, raising disposable incomes will obviously still increase it to some extent — but this is what Keynesians fear. To them increased savings are something to be feared. (Many Keynesians commentators now appear paranoid on the savings issue). According to their way of looking at the world, tax cuts do more good when they are entirely spent on consumption while saving more will lead to leakages, as if incomes were leaky taps, and these leakages will depress the economy. As I have pointed out a number of times, savings fuel economies. It is savings that provides the plant and machinery (all those lovely chip-making facilities that our would-be central planners used to be in love with) that raises our standard of living. Without savings we would eventually make Ethiopia look rich in comparison. To put it another way, to save is to consume less to day so that we can consume more tomorrow, regardless of what Maynard Keynes asserted. But when Keynesians advocate tax cuts they invariably call for increased government spending. Okay, you're asking how does government raise spending while cutting its revenue? Simple. It prints the money. Most people call this fraud — Keynesians call it growth. But how can printing money expand growth? It cannot. But it's a great recipe for slashing purchasing power and destroying savings, the very thing that fuels growth. Now the Austrian school of economics has described in great detail how credit expansion causes depressions and not demand deficiency. Credit expansion policies create malinvestments that eventually appear as idle capital and unemployed labor. When this happens Keynesians scream demand deficiency, not realising that their policies are responsible for the situation. (Actually, the idea that credit expansion can "turn stone into bread" antedates Keynes. But since this fallacy is central to Keynesian thinking it is now intimately connected to him). The Keynesian remedy works by using rising prices to make these malinvestments profitable again by reducing their labor costs. In other word, Keynesianism uses inflation to cut labour costs relative to the value of their product and so increase the demand for labor. Unfortunately, another effect is to lay down the foundations for a future recession. This is a fact that Keynesians simply refuse to acknowledge. Now it is true that by pricing even malinvestments back into operation total output is increased, if only temporarily. But a simple increase in output is not economic growth. The Austrian school stresses that capital forms a complex structure consisting of stages of production, which in turn consist of heterogeneous capital goods. Growth occurs when we expand this structure, adding more and more complex and productive stages to it. In trying to keep it simple this outline could give the erroneous impression that Austrians believe that the structure has an infinite length. What happens is that the structure also changes with changes in technology. In other words, it is continuously being reshaped). But the means to expand the structure, i.e., create the additional capital goods, can only come out of savings. And this brings us to the Keynesian fallacy that growing faster than your trading partners causes balance-of-payments problems. Not so: these problems are caused by inflating faster than your trading partners and not by having a faster rate of capital accumulation. Only by increasing our savings rate can we genuinely grow faster. The Keynesian policy of credit expansion will only waste resources and create more depressions. Gerard Jackson is Brookes' economics editor